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tv   Bloomberg Real Yield  Bloomberg  November 24, 2018 2:30pm-3:01pm EST

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jonathan: from new york city, i am jonathan ferro. this is "bloomberg real yield." ♪ jonathan: investors reassessing what 2019 brings. abandoning hope for a year and rally, the worst year since 2008. looking ahead to the g20, the much-anticipated meeting between president trump and president xi. we begin with the big issue, investors drowning in downside risk. >> the biggest risk is trade. it continues to be trade.
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>> the prospect of tariffs frightens me the most. >> the u.s. economy will start slowing down in 2019. >> maybe jay powell backs up a bit. >> he is acknowledging the headwinds. >> the question is how hard should they be having a break? >> more than three. >> three. >> absolutely not. do they stop in 2019? absolutely. >> rising rates are bad for existing prices and really good for long-term returns and fixed income. >> by biggest concern is volatility will continue for 2019. unfortunately the volatility in financial markets has potential to be the proximate cause for the end of the economic cycle. >> in 2019, it will be about let's take uncertainty off the table. jonathan: joining me is ira jersey, noelle corum and jose rasco. great to have you with us. noelle, breakevens have rolled over.
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normal yields have declined. i want a better understanding what degree we are pricing in expectations? noelle: we think the market is beginning to price in moderate growth in year and and in 2019. q1 and q2 will be supported by fiscal policy and a healthy consumer tight labor market. but q3 and q4, fiscal policy 2.0 isn't necessarily certain and also you have a fed that continues to tighten. that's what the market is becoming more concerned about. jose: that makes sense to us. we think of growth will slow next year. the other problem is on the government side you talk about fiscal expansion. where is the money coming from? there is talk of a $1 trillion infrastructure plan.
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allegedly both sides of the aisle want it. where is the money coming from? the deficit is going up to $1.3 trillion. i think we have a bit of an issue in terms of the sovereign market. ira: it does not seem like the treasury market really cares if there is another $1 trillion in infrastructure spending. most of this rally is important and the market has been pricing out inflationary pressures. that is what has happened the last couple of weeks with this move. it has all been in breakevens. we were up 20 basis points year to date, now we are at zero. it is not a real yields story or a growth story. real yields and growth and expectations tend to be pretty good. it's an inflation story. jonathan: many people thought they would be an accompanying pickup inflation along with fiscal stimulus. we seem to have priced that all out. ira: i think oil has a big piece to do with that. oil prices coming off their lofty levels. back down now below $60. i don't know where we are right now. clearly that is one of the
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reasons why inflation expectations have come down. when you look at short end breakevens, is well below 2%. it was 2% only a couple of weeks ago. jonathan: underpinning this conversation is what the fed does next. you will listen to that. do we get three, four? will the fed change the pace of the journey in 2019? relative to 2018? noelle: going back to inflation, 2019 is going to be very much about inflation. we think it will be interesting story. q1, the tariffs will hit. we think that will add 30-50 basis points on a month over month basis. and then we also have wages that are finally showing signs of life. we watch a rate that has been at levels -- it has been, but it's an indicator that we will start to see employers leave the company and get paid more elsewhere. these are persistent. you mentioned oil, but wages are
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persistent pressures. that will bring the fed into play. that said, we don't see a breakout inflation, breakout in wages, but it will make 2019 much trickier for the fed because growth will be moderating. inflation will be noisy with tariffs and wages. some will be transitory and some not. we think the growth -- the fed will have some tough decisions to make in q3 or q4 next year. if we don't see fiscal policy, i think the fed is only going to go twice. jonathan: interesting. jose: we have the fed going twice next year and lowering rates twice in 2020. we think growth will moderate more than most people. jonathan: that is a big call. a lot of people are thinking about, when do i reinitiate? jose: our view is much more sanguine on inflation than yours. there is a trend of deflation from the tech sector that is
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just beginning. the wage story, i can't disagree with the numbers. we are above 3%. we are at 3.7% on the unemployment rate. a big story in this business cycle has been how tech is displacing jobs and the monster robots will take our jobs, and jonathan ferro will be a robot in two years. jonathan: i hope not. [laughter] jose: i actually am a robot. ira: we have to consider the global environment, as well. you look at europe. you have brexit bringing up a lot of uncertainty. europe is not as robust as many in of us thought. when you have yields globally coming down when we thought maybe they would be going up, the fact we don't have 1% yields in germany today, i don't think many people had that in their forecast. even if they were bullish on the u.s. market compared to consensus like i have been. i think that's an important thing we have to notice. german yields are going to be
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helping u.s. treasury yields for at least the next 18 months. jose: that is the curve flattener we have seen. we continue to see tremendous demand. you look at the spread between bonds and bunds, you could drive a truck through that. 270 basis points and we think that is persistent. because of the strength and consistency of demand here relative to the inconsistency. the other thing, globalization. global. let's talk about globalization. you have a lot of nationalistic policies going on in the political movements and the globalization story is taking a backseat the national issues. that is another question on the wage side. if that continues, and we have more closed doors, do you see more wage pressure? we don't think so. trade volumes are picking up. jonathan: i think it is important. if you ask people in the fixed income world what the most important move was, the front
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end of the treasury curve. the repricing reset everything else. i would pick up on what you said about the 10-year bunds. for me, that is the most surprising part of 2018 for me. it is set to finish the year where it started, at about 40 basis points. i'm not sure how many people saw that coming. ira: we were talking about the end of quantitative easing in europe bringing about a lack of demand pressures in bringing down yields in europe. in fact, what has happened is instead, you have the repricing in europe for slower growth, slower inflation than anyone thought of a year ago. that is what has been going on in a lot of europe. markets don't like uncertainty. when there is a lot of uncertainty, people go to government bonds, particularly bunds and treasuries. jose: buying the risk-free rate. jonathan: what is the ecb doing in the back end of 2019? jose: put those two together. the ecb is talking about letting bonds rolloff at the end of next year. what happens to sovereign corporate spreads in that environment?
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i think they blowout. ira: italy still has a lot of fiscal problems they have to contend with. we don't know what will go on in other peripheral nations like portugal. i think greece is a much different story. jonathan: everyone is sticking with me. next up, the auction block. a ballooning u.s. budget shortfall causing the treasury to set a refunding record. that is next. this is "bloomberg real yield." ♪
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♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block and look at where we stand in 2018. first, we start with the rise of issuance from the u.s. treasury. in the calendar year, there has been $1.2 trillion raised in net new cash, dwarfing previous years. high-yield issuance was the opposite. year-to-date sales slowing to levels we have not seen since 2009. plus, we are on track for the slowest november since 2008. in leveraged loans, the surge continues. more than $762 billion in new loans issued, with new money rising around 8% over a year ago. last year's huge volumes were largely driven by a wave of repricing. still with me is ira jersey, noelle corum and jose rasco. you i want to talk about what is happening in credit. high-yield investment grade, both in euros and in dollars set for an annual loss for the first time since 2008. how significant is that? noelle: going back to my growth view for 2019, we expect growth to moderate. we are guessing it will be around low two's by the end of the year.
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that's still a relatively positive platform for credit. we think it is going to -- as long as inflation, which we don't think it will, breaks out in a significant way, the fed will be able to respond to the moderating growth picture and take a step back and only go twice. i think that paints a rosy picture for credit next year. there have been some cracks in credit this year. there is no denying that. we think it just makes an analyst's job that much more important. at the end of the day, these companies remain healthy.
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leverage and defaults remain low. we think 2019 paints a good picture for credit. ira: i think credit probably has more to go in terms of risk repricing. on some level the fundamentals have not turned, not significantly. slowing profitability does not mean lower profitability. companies that are profitable don't tend to default. for investment grade in particular, you are not looking at necessarily is significant repricing. the risk is you continue to have more m&a deals or debt finance. a lot of corporate issuance has to be out there. balance sheets are more levered today than they were five or six years ago. that risk is rising but it is not at a tipping point quite yet. that is probably not a 2019 story. jonathan: a lot of people are concerned about the bbb component about investment grade.
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in dwarfs high-yield in and of itself. some would say they are idiosyncratic risks. i've been exploring the idea of at what point does the surge in idiosyncratic risk become systemic? it quickly becomes widespread and systemic. are we going to see that in investment-grade? jose: we are more interested in investment-grade because we see the dispersion in terms of cash versus debt. in the s&p 500 cash view towards the top end of the scale and debt is more evenly disturbing. the problem you've got there, you could see some more repricing of credit as we go to next year, no question. ira: one interesting thing is during the recent movement in credit spreads and treasury yields, corporate yields have not moved very much. you have corporate yields basically staying flat, treasury market rallying. lower yields for treasury. that is what is causing the spread widening. it's not like the actual cost of capital has gone up a lot for these companies. when you look at the bloomberg barclays corporate index, the
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yield is still 4.3%. a month ago it was at 4.3%. even though credit spreads are wider, the actual funding is not going up very much. noelle: i was hoping you would come to me. i have one more point to add. growth is going to do well in 2019. credit is going to perform well unless we see a recession hit. we see no evidence in that, can -- in that, in the underlying growth data, the indicators, we have no indicators of a recession in 2019. until we see that, that is a turning point you were talking about where it would turn into systemic. that is where we would start to be concerned. jonathan: if you believe the said it will slow down, you think there is a rate cut on the
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horizon, i want to understand why leveraged loans will remain attractive at from a floating rate angle. there are two reasons to buy them, there is the credit risk appetite and the rate aspect to it, but i believe the federal slowdown. why would i want leveraged loans over, say, high-yield? jose: we don't have the fed slowing down until the middle of next year. we are on the short end of the curve in terms of duration, in terms of leverage as well. we are more interested in the investment-grade part of the business on credit, and more toward the short end of the curve. as you move forward, the concern we have is that it's about the average cost of capital. we have the moment we see the capital going up to a point where it is concerning at the lower end, the bbb's, etc. even on investment-grade scale. noelle: something unique is institutional demand. we still see that is there. the demand we expect to continue into 2019.
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that tends to be stickier money, 80% of the market. we still think there is relative value with the loans. ira: i don't have much to add about the loan market. loans are used a lot for m&a activity. a lot of what will happen in 2019 are how many deals will get done, and will they be done with supply from leveraged loans and can the institutional market absorb the supply? some deals we have seen, they were done with cash. it is the big technology companies, like amazon earlier this week saying they will bid on other assets. that is not necessarily going to be finance. it depends on how the m&a activity shapes up. jonathan: the supply story has been a lot more prominent in investment-grade in investment loans relative to high-yield. do you see that changing next year? noelle: no, because you have this m&a market that has a lot of supply. we really don't see much in the
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pipeline. i think that will be a positive technical. end of year and 2019. jonathan: you guys are very constructive on credit given the moves we have seen. ira: it is relative. one of the issues is that credit tends to crack quickly. it usually has to do with things like slowing revenue, a much slower economy. we are seeing a modest slowdown in the economy but we have not rolled over. if we are going to roll over in 2020, it is the second half of next year to see those cracks in credit. if we don't, we are in noelle's camp and credit will do just fine. it depends on what is your outlook for the next 18 months before you worry about credit? jonathan: you guys will stick with me. still ahead, the final spread. the week ahead featuring the g20 meeting the market has been waiting for. president trump and china's xi jinping. this is "bloomberg real yield." ♪
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♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. coming up next week, we hear from jay powell and get minutes from the latest fomc meeting. a new round of data on the u.s. economy, including gdp, and the highly anticipated g20 meeting that features trade talks president donald trump and between china's xi jinping. final thoughts from ira jersey, noelle corun from invesco and jose rasco. let's look ahead to next week. ira, what are you looking from the talks? ira: we would like some closure. markets hate uncertainty. having closure, knowing what any kind of trade deal may be would be great.
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are we going to get it? no. the likelihood of getting something definitive at of the g20 meeting is low in my opinion. jonathan: the markets have settled on the idea of no fundamental change. but the cease-fire might be enough to get a rally. is that what you are looking for next week? noelle: i don't think we get a cease-fire. i agree that we would love some closure, but i don't think we will get that. these things take time. history tells us they take time, especially the strategy related to trade goals that the administration has. there will continue to be highs and lows. we just have to watch them closely. jose: i have slightly more optimistic. we want closure as well, but if you look at the feedback the president has gotten on trade policy, it has been go fight the
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good fight. to your point on inflation, it is killing certain sectors of the economy. there are winners and losers, but there are a lot of complaints in terms of inflationary potential. jonathan: something i have come back to a lot in the last year or so since the started picking up in the spring is whether this is a convenient scapegoat for global deceleration and economic growth. i think a lot of it may not be because of the trade story. something else is happening. in china there is a domestic story. a slowdown that is separate. jose: let's be honest about tariffs. when somebody raises prices 25%, you don't buy their products. you buy another product that is comparable. consumers can switch. we have seen huge shifts in terms of supply chains in the last six months. we will continue to see that play out over the next coming months. at the end of the day, there is a fundamental story going on in terms of a global slowdown, in particular in europe. the pmi's look like a ski slope downward. europe continues to lose growth momentum. jonathan: there is a market sentiment issue, and that is trade, and then there are economic fundamentals. there is something else. ira: when you look at the underlying -- we thought there was an output gap and it was
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much higher than it is. in i think we really have since 2009, we have lower potential growth. we basically hit up against that number. good to get back there and wind up having growth of 3% persistently? maybe, but probably not. 2.5% is closer to where growth will be for the long-term. we have to have a little bit of an adjustment. jonathan: i will wrap up with the rapid fire round. you know how this works. quick questions, quick answers. have we seen the high for the 10-year yield? ira: yes. noelle: yes. jose: yes. jonathan: that was quick. leveraged loans or high-yield next year? ira: yes. ira: leveraged loans.
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noelle: loans. jose: loans. jonathan: i don't even need to say your names. cease-fire or escalation at next week's g20? ira: escalation. noelle: i will have to go with escalation. jose: i will be the optimist. cease-fire. jonathan: thank you very much for joining me. ira jersey, noelle corun and jose rasco. from new york city, that does it for me. we will see you next friday at 1:00 p.m. new york time this is "bloomberg real yield." this is bloomberg tv. ♪
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carol: welcome to "bloomberg businessweek." jason: we are here at bloomberg's global headquarters in new york. carol: in this week's issue, the predatory lending machine crushing small businesses. jason: and what is crushing an auto executive from nissan. carol: some stocks have lost over $800 billion is the end of august.

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